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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1)
On December 31, 2015, Peligrino Co. has a long term note payable of $800,000. Of that
balance, $100,000 will be paid within one year from the balance sheet date. How much
of the note payable should Peligrino Co. report as a non-current liability when they
prepare the December 31, 2015 balance sheet? 1) A) $800,000. B) $900,000. C) $1,000,000. D) $700,000. E) Nothing. Disclose in a note to the financial statements. Answer: D
Explanation: A) B) C) D) E) 2) Pending lawsuits: 2) A) Are always considered estimated liabilities. B) Should always be disclosed. C) Should always be recorded. D)
Should be disclosed if payment for damages is probable but the amount cannot be
reliably estimated. E) None of these answers is correct. Answer: D
Explanation: A) B) C) D) E) 1
3)
West Coast Outdoor Co. sold $22,000 worth of trampolines with a one year warranty.
The company estimates that 2% of the sales will result in warranty work. West Coast
Outdoor Co. should: 3) A) Recognize warranty expense at the time warranty work is performed. B) Recognize warranty liability at the time of sale. C) Recognize warranty expense at the time of sale. D)
Recognize warranty expense at the time warranty work is performed and warranty
liability at the time of sale. E) Recognize warranty expense and warranty liability at the time of sale. Answer: E
Explanation: A) B) C) D) E) 4) The current portion of long-term debt: 4) A) Is shown separately from the long term portion on the balance sheet. B) Must be disclosed. C) Refers to the part of long-term debt that is due within one year. D) Will be a known amount. E) All of these answers are correct. Answer: E
Explanation: A) B) C) D) E) 5) Known liabilities: 5) A) Have a known payee. B) Have definite due dates. C) Are set by agreements, contracts, or laws. D) Are measurable. E) All of these answers are correct. Answer: E
Explanation: A) B) C) D) E) 2
6) A contingent liability: 6) A) Is a liability of a specific amount. B)
Is a potential obligation that depends on a future event arising out of a past
transaction. C) Is an obligation arising from the purchase of goods or services on credit. D) Is an obligation not requiring immediate payment. E) None of these answers is correct. Answer: B
Explanation: A) B) C) D) E) 7)
MiniCompany borrowed $6,000 by signing an 8% interest-bearing 45-day note payable
in exchange for an overdue accounts payable. To record this transaction, MiniCompany
should prepare a journal entry that includes a: 7) A) Debit to Cash for $6,000. B) Debit to Cash for $6,300. C) Credit to Notes Payable for $6,000. D) Debit to Notes Payable for $6,000. E) Credit to Accounts Payable for $6,000. Answer: C
Explanation: A) B) C) D) E) 8) Payroll liabilities for current employees are: 8) A) Current liabilities. B) Estimated liabilities. C) Can be either current or long-term depending on when workers retire. D) Contingent liabilities. E) None of these answers is correct. Answer: A
Explanation: A) B) C) D) E) 3
9) Which of the following items below is recorded as an estimate when initially recognized: 9) A) Notes payable B) Warranty obligation C) Unearned revenue D) CPP payable Answer: B
Explanation: A) B) C) D) 10) Fees accepted in advance from a client: 10) A) Are recorded as liabilities. B) Do not increase assets. C) Increase income. D) Are recorded as earned revenues on the income statement. E) None of these answers is correct. Answer: A
Explanation: A) B) C) D) E) 11) The characteristics of a liability include: 11) A) A liability can be current or noncurrent. B) Requirement of future payment of assets or rendering of services. C) Occurrence of a past transaction or event. D) Existence of a present obligation. E) All of these answers are correct. Answer: E
Explanation: A) B) C) D) E) 12) Liabilities: 12) A) Must be certain. B) Can be reliably estimated. C) Must be for a specific amount. D) Must have a date for payment. E) Must have a known payee. Answer: B
Explanation: A) B) C) D) E) 4
13) A short-term note payable: 13) A) Is a written promise to pay a specified amount. B) Is not recorded until it is repaid. C) Is an estimated liability. D) Is a contingent liability. E) Usually does not bear interest. Answer: A
Explanation: A) B) C) D) E) 14) Provincial sales tax payable: 14) A) Is a business expense. B) Is a contingent liability. C) Is a current liability for retailers. D) Is an estimated liability. E) All of these answers are correct. Answer: C
Explanation: A) B) C) D) E) 15) The receipt of $6,000 in advance ticket sales would be recorded as: 15) A) Debit Cash, credit Revenue Payable. B) Debit Cash, credit Unearned Revenue. C) Debit Unearned Revenue, credit Sales. D) Debit Unearned Revenue, credit Cash. E) Debit Sales, credit Unearned Revenue. Answer: B
Explanation: A) B) C) D) E) 5
16) Long-term liabilities: 16) A) Are obligations of a company not requiring payment within one year. B) Are sometimes reported on the income statement. C) Are liabilities arising from future events. D) Are obligations requiring payment within one year or less. E) Are not recorded until they are paid. Answer: A
Explanation: A) B) C) D) E) 17)
West Coast Outdoor Co. estimates that warranty expense will be 1% of sales. The
current period’s sales were $740,000. The entry to record the warranty expense is:
17) A) B) C) D) E) Answer: A
Explanation: A) B) C) D) E) 6
18)
During 2017, Smith Electronics sold 250 microwaves each at $950 per unit. Each
microwave has one year warranty. In Smith estimate, it will cost them $62 per unit, if a
unit is brought in under warranty for repair. During 2017, Smith spent $12,500 on
warranty costs for the appliances sold in 2017. At the end of the 2017 the warranty
liability and the warranty expense related to these sales would be: 18) A) Warranty liability: 3,000; Warranty expense: 15,500 B) Warranty liability: 12,500; Warranty expense: 12,500 C) Warranty liability: 3.000; Warranty expense: 12,500 D) Warranty liability: 15,500; Warranty expense: 15,500 Answer: A
Explanation: A) B) C) D) 19) An estimated liability: 19) A) Is a known obligation of an uncertain amount. B) Is a liability that may occur if a future event occurs. C) Can be the result of a lawsuit. D) Is an unknown liability of a certain amount. E) None of these answers is correct. Answer: A
Explanation: A) B) C) D) E) 20) Unearned revenues are: 20) A)
Amounts received in advance from customers for future delivery of products or
services. B) Reduce assets. C) Not recorded as liabilities. D) The same as accrued revenues. E) All of these answers are correct. Answer: A
Explanation: A) B) C) D) E) 7
21) Provisions must be recorded if: 21) A) The future event is probable, but the amount cannot be estimated. B) The future event is unlikely. C) The future event is unlikely, but the amount can be reliably estimated. D) The future event is probable and the amount can be reliably estimated. E) All of these answers are correct. Answer: D
Explanation: A) B) C) D) E) 22) Promissory notes: 22) A) Are due on a specific date. B) Are negotiable. C) Can be current or non-current. D) Can be transferred from party to party by endorsement. E) All of these answers are correct. Answer: E
Explanation: A) B) C) D) E) 23)
Obligations due to be paid within one year or the company’s operating cycle, whichever
is longer, are: 23) A) Current assets. B) Operating cycle liabilities. C) Non current liabilities. D) Revenues. E) Current liabilities. Answer: E
Explanation: A) B) C) D) E) 8
24) Contingent liabilities occur when the liability is: 24) A) Known and determinable. B) Cannot be reliably estimated. C) Probable and can be reliably estimated. D) Reliably estimated. E) All of these answers are correct. Answer: B
Explanation: A) B) C) D) E) 25) Employee vacation benefits: 25) A) Are not recorded until the employee leaves. B) Are contingent liabilities. C) Are not required by law. D) Become an expense when the employee takes a vacation. E) Are estimated liabilities. Answer: E
Explanation: A) B) C) D) E) 26)
West Coast Outdoor Co. signed a $8,000, 90-day, 4% interest-bearing note payable at the
bank in exchange for cash. Which of the following journal entries should West Coast
Outdoor Co. use to record the note?
26) A) B) C) 9
D) E) Answer: E
Explanation: A) B) C) D) E) 27) A combined GST and PST rate of 12% applied to taxable supplies is called: 27) A) Input Tax Credit. B) Harmonized Sales Tax. C) Zero-rated tax. D) Combined Sales Tax. E) None of these answers is correct. Answer: B
Explanation: A) B) C) D) E) 28) Gross pay is: 28) A) Deductions withheld by an employer. B) Total compensation earned by an employee. C) The amount of the paycheque. D) Take-home pay. E) Salaries after taxes are deducted. Answer: B
Explanation: A) B) C) D) E) 10
29) Uncertainties such as doubtful accounts: 29) A) Are provisions because the amounts are uncertain. B) Should not be disclosed. C) Are provisions because they are future events arising from past transactions. D)
Are not provisions because they are future events not arising out of past
transactions. E) Are not provisions since they relate to normal business activities. Answer: E
Explanation: A) B) C) D) E) 30)
Which of the following is created by the adjusting entry to recognize interest expense
incurred but not yet paid? 30) A) Notes payable. B) Interest expense. C) Interest revenue. D) Prepaid interest. E) Unearned revenue. Answer: B
Explanation: A) B) C) D) E) 31) Accounts payable: 31) A) Are amounts owed to suppliers for products and services purchased on credit. B) Have specific due dates. C) Are estimated liabilities. D) Are long-term liabilities. E) All of these answers are correct. Answer: A
Explanation: A) B) C) D) E) 11
32) The employer should record payroll deductions as: 32) A) Current liabilities. B) Employee receivables. C) Payroll taxes expense. D) Wages payable. E) Employee payables. Answer: A
Explanation: A) B) C) D) E) 33) Estimated liabilities can arise from: 33) A) Property taxes. B) Warranties. C) Income taxes. D) Employee benefits. E) All of these answers are correct. Answer: E
Explanation: A) B) C) D) E) 34) Unearned revenue is initially recognized with a: 34) A) Credit to revenue. B) Credit to revenue payable. C) Debit to unearned revenue. D) Debit to revenue. E) Credit to unearned revenue. Answer: E
Explanation: A) B) C) D) E) 12
35) Short-term notes payable: 35) A) Can replace an account payable. B) Are usually interest bearing. C) Usually represent money borrowed from a bank. D) Are recorded as current liabilities. E) All of these answers are correct. Answer: E
Explanation: A) B) C) D) E) 36)
Which of the following accounting policy is being observed when we recognize a
warranty obligation? 36) A) Full disclosure B) Consistency C) Matching D) Materiality E) Timeliness Answer: C
Explanation: A) B) C) D) E) 37)
The difference between the amount received from a note payable and the amount repaid
is: 37) A) Principal. B) Interest. C) Face value. D) Premium. E) Discount. Answer: B
Explanation: A) B) C) D) E) 13
38) Obligations not expected to be paid within one year are reported as: 38) A) Current liabilities. B) Long term liabilities. C) Current assets. D) Operating cycle liabilities. E) Revenues. Answer: B
Explanation: A) B) C) D) E) SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 39)
On November 16, Predator Company borrowed $112,000 from DT Bank. The
loan had an interest rate of 10% and was due in 90 days. Predator Company’s
fiscal year-end is December 31.
Prepare the journal entry to record the interest due at December 31. 39) Answer: Explanation: 40)
On November 16, Predator Company borrowed $112,000 from DT Bank. The
loan had an interest rate of 10% and was due in 90 days. Predator Company’s
fiscal year-end is December 31.
Prepare the journal entry to record the payment of the note on Predator’s books. 40) Answer: Explanation: 14
41)
During November 2017, Sunset Airlines sold out all of its eight flights going from
Toronto to Cuba. Two flights depart in December, 2017 and six flights depart in
January 2018. Sunset collected $1,960,000 in November 2017 for the flights.
Sunset’s year end is December 31.
Required:
What adjusting entry would be needed to recognize revenue for 2017? Date the
entry.
What would be the value of the liability on Sunset’s Balance Sheet at December
31, 2017? State if the liability is current or non-current. 41) Answer:
a)
December 31, 2017
Unearned Revenue (Advance ticket sales) 490,000
Flight Revenue 490,000
Current Liability = 1,470,000 Explanation: 42)
On November 16, 2015, Kinsmen Sports gave Source for Sports a 120-day, 8%,
$120,000 note payable to extend a past due account payable.
What amount of interest expense should Source for Sports report for calendar
2015? 42) Answer: $1,183.56 = 45/365 x .08 x $120,000 Explanation: 43) Discuss the types of estimated liabilities. 43) Answer:
Estimated liabilities are known obligations of an uncertain amount, but an
amount that can be estimated. These types of liabilities are often referred to
as provisions. Warranties, income taxes, and some employee benefits are
common types of estimated liabilities. Warranties are estimated liabilities
because the obligation to repair defective merchandise exists at the time of
sale. The amount of potential warranty work can be estimated based on past
sales. Income taxes are estimated liabilities based on income earned by a
corporation. The amount can be estimated based on the corporate tax rate.
Employee benefits are generated as employees earn their wages. Amounts
can be estimated based on contractual agreements or past experience. Explanation: 15
44) Discuss how to account for contingent liabilities. 44) Answer:
A contingent liability exists when the liability is not probable or it cannot
be estimated. Contingent liabilities are disclosed in the notes to the
financial statements unless the possibility is remote that there will be an
outflow of resources in which case, the item is not recorded nor disclosed.
Explanation: 45)
On June 14 , Multi Sports received a 90-day note payable from Single Sport,
instead of cash payment of an overdue account. The amount of the note was
$45,000 at an interest rate of 10%.
What is the total amount of interest for the note? 45) Answer: $1,109.59 (90/365 x .10 x $45,000) Explanation: 46)
On September 15, Lohr Co. borrowed $50,000 from Close Bank. The loan had an
interest rate of 12% and was due in 60 days.
Prepare the journal entry for Lohr Co. to record the note. 46)
